LONDON (Reuters) - The
dollar hit its highest in a month against the yen on
Wednesday, reflecting a jump in Treasury yields this
week that has helped prod the U.S. currency to
three-month highs in trade-weighted terms.

The Swedish crown was the biggest gainer among the main European
currencies, driven higher by better than expected industrial output
data.

Longer-dated U.S. Treasury yields have risen 20 basis points in the
past week and the spread between two-year German and U.S. government
bonds - the most directly responsive to interest rate moves - is
within a whisker of its highest since mid-2007.

Hanging over the market are expectations the European Central Bank
will take action on Thursday to support growth that would put
official returns on euros into negative territory.

That has provoked some yo-yo moves for the euro in recent days but
the week's dominant trend is for a stronger dollar.

"What we've seen this week is reality bites and it's as simple as
that," said Simon Derrick, head of currency research at Bank of New
York Mellon in London.

"There is a realization taking place that the Fed is concerned by
the scale of risk-taking that is going on and as such it will plough
on with tapering (of bond-buying) and will be as realistic on
monetary policy as it can be."

Disappointment over the pace of U.S. economic growth in the first
quarter meant the dollar defied recommendations put out by banks and
investment houses at the start of 2014 for a surge in its value.

But expectations the ECB is headed for further action to ease policy
have reinforced the base case for a stronger U.S. currency - that
returns on U.S. government debt will rise while those in the euro
area fall.

Two-year U.S. yields stood at 0.403 percent, a 34 bps premium over
the equivalent Bund. It has only been higher than that once - 35 bps
briefly in May 2010 - since the financial turmoil of 2007 and 2008.

In European trade, the dollar gained 0.2 percent to 102.665 yen, was
up less than 0.1 percent against the euro at $1.3621 and a touch
lower versus the pound at $1.6736.

CROWN IN GLORY

There have been question marks over the health of the Swedish
economy, hit as elsewhere in Europe by the threat of deflation, and
a 3.0 percent rise in industrial production in April, compared with
March, did something to settle those nerves. ECONSE

Production had fallen in March and the crown gained a third of a
percent against the euro SEK= EURSEK=. It remains within 1 percent
of one-year lows against the euro and dollar.

With expectations apparently strong that the ECB will cut its
deposit rate on Thursday, the key question for short-term players is
whether that action - and any additional measures that may well
accompany it - is fully priced in to the euro.

A number of dealers in money and foreign exchange markets said they
thought that was not yet the case.

"If you forced me to take a view on spot (euros), then I would say
it will go down," BNY Mellon's Derrick said. "As to how I would
trade it, I think I would get myself long of volatility. By any
historical reference point, vols are still amazingly low."

That refers to another of this year's big trends - the collapse in
the volatility of major exchange rates which banks traditionally
need to generate trade and hence returns.

Their hope is that ECB action may trigger larger moves. One-month
vols have jumped from 4.8 percent - the lowest since 2007 - to 6.6
percent on Wednesday.

(Additional reporting by Ian Chua in Sydney and Masayuki Kitano in
Singapore; Editing by Toby Chopra)